Traditional thinking is that each insurance policy stands on its own. Accordingly, people do not tend to think of an automobile insurance policy influencing a health insurance policy, or of a health insurance policy influencing a life insurance policy. Sometimes, an insurance company, or a group of companies having entered into a business relationship, will give a premium discount to make a sale of more than one policy to a person, e.g., if a consumer purchases automobile and homeowners insurance from the company or group of companies. So far as is known, such a discount involves giving up some of the respective profits for each policy individually, or passing to the consumer some of the savings in administrative expenses realized by the company or group of companies.
As another example, if different persons in the same family, e.g., spouses, are covered by the same type of insurance, e.g., nursing home insurance, an insurance company may give a premium discount to one or both spouses based on anticipated savings in claims costs that would accrue if one spouse became sick and was able to delay entry into a nursing home because the healthy spouse provided care in their home.
However, so far as is known, such discounts are distinctly different from this invention wherein a first insurance policy that can be sold without a second insurance policy is affected by the concurrent presence of the second insurance policy; the second insurance policy being for a risk different from that of the first insurance policy; the policies being for the same person; and the second policy affecting a claims cost of the first policy.
A more particular example involves a group of insurance policies collectively referred to as long-term care insurance. This group provides coverage to a person primarily for the risks of home health care and nursing home care, each of which can be covered in separate policies or combined in a single policy, and may include additional coverage for the person for the risks of community-based care, assisted living care, and/or care in any other type of setting approved by an insurance company.
Long-term care insurance policies were first offered to the public by insurance companies at about the time when Medicare came into being in 1966, a time in which the insurance industry was not known as being in the vanguard of computerization. These first policies were developed when almost everyone confined to a nursing home was elderly and unable to take care of themselves because of chronic cognitive or physical impairments. That is, their health conditions had deteriorated to the point that they were no longer able to care for themselves without the assistance of another person. They were not expected to recover from those conditions. (Anecdotal evidence strongly suggests that this stereotypical view of nursing home patients is still held by most people despite the fact that 8 of every 10 of today's nursing home admissions are patients sent there to recover following hospitalization.) And, health care provided in a patient's home by skilled medical professionals was virtually non-existent.
As a result, the first long-term care insurance policies covered only nursing home care. Pricing the policies was difficult because very little data--seemingly only the average length of stay and average daily cost of care--was available to assist insurers. Furthermore, computer modeling techniques and predictive tools apparently were not being utilized. Thus, the first policies provided fixed benefits without regard to patients' actual medical conditions, that is, their medical, physical, and mental states of health, at the time of claim.
Under a fixed-benefit arrangement, insured persons select a specific benefit amount at the time they apply for a policy. The benefit amount can be expressed in a daily, weekly, monthly, or other duration-specific periodic manner. The benefit amount can also be expressed as a flat amount that, upon qualification, will be paid regardless of the cost of the care received. Or, it can be expressed as a benefit limit in which case a patient's expenses will be paid up to the periodic limit. Under a fixed-benefit arrangement, neither the flat amount nor the limit can be increased solely because a patient's health condition deteriorates after the patient qualifies for benefits.
Sales of such nursing home policies remained low for almost twenty years, resulting in a corresponding low demand for advances in computer science as applied to such policies. Other than minor improvements, the policies continued to provide only nursing home benefits until two things occurred. First, surveys showed that 75% to 80% of all seniors strongly preferred to receive care at home; only 1% to 2% preferred a nursing home.
Second, beginning in October 1983, in response to rapidly rising hospital costs, Medicare began to reimburse hospitals using a prospective payment system based on Diagnosis Related Groups (DRGs). Before this change, seniors covered by Medicare remained hospitalized until, in most cases, they required only minimal assistance after discharge. This provided hospitals with a very strong financial incentive to keep patients hospitalized for as long as possible.
But, under the prospective payment system, each patient was assigned to one of 472 different DRGs, each of which had a specific dollar amount allotted to it. The dollar amount was based on the relative severity of the medical condition for the average patient. Except in extraordinary cases, Medicare paid the hospital that dollar amount for the patient's treatment, regardless of the severity of the patient's actual medical condition. In most cases, if the patient remained hospitalized too long, the hospital spent more for the patient's care than it received from Medicare. Thus, for the first time, hospitals had a very strong financial incentive to release patients before their Medicare money ran out.
In 1968, the average hospital stay for seniors was 14.2 days; in 1982, the last full year before the prospective payment system was implemented, it had dropped to 10.1 days; and, in 1996, the average hospital stay was only 6.6 days.
Today, almost half of all senior patients need skilled medical care--care that can't be provided by friends or family--during their recovery after release from a hospital. Technological advances now allow virtually all care provided in a nursing home to be provided in patients' homes. Thus, whether patients recover in a nursing home or in their own home now depends more often on what they can afford. Because home health care for recuperating patients is frequently more expensive than nursing home care, and because the combination of Medicare and private Medigap insurance policies can pay 100% of the costs for nursing home care during the first 100 days, most recuperating patients are sent to nursing homes even though 75% to 80% strongly prefer to recover at home.
Whereas 30 years ago most nursing home patients were old, feeble, and at the end of their lives, today's "quicker and sicker" hospital discharges have dramatically changed the type of patients in nursing homes. Today, approximately 72% of the seniors who are sent to nursing homes typically stay for less than 90 days while they receive skilled medical care to recover after a hospital confinement. Contrary to the fears of many seniors, nursing homes are no longer "the end of the road;" indeed, 91% of Medicare's nursing home patients recover and are sent home to resume their lives.
However, the inventors herein have observed a problem apparently unrecognized in the insurance industry--an inadequate response to the shift in the delivery of health care services. Newer versions of the old policies did include benefits for home health care, but with very little reliable information available to actuaries, insurers simply extended their old concepts for nursing home benefits to the new home health care benefits and increased their premiums accordingly. The insurers did not change the way they determined benefit amounts for nursing home or home health care, irrespective of the wide variance in the costs of providing care for seniors with different health conditions.
At first, most companies limited home health care benefit amounts to 50% of the amounts payable for nursing home care, but the policies still didn't sell very well. They were too expensive for most people. Gradually, companies began to offer newer policies in which home health care was optional, and other policies that provided only home health care benefits. And, many companies began to offer equal benefits for both home health care and nursing home care. While the rate of sales did increase somewhat, the fact remains that, after 30 years of sales, only about 2% of people age 50 and older are covered by these policies even though long-term care represents the largest potentially devastating financial risk for most seniors.
The newest versions of the policies include additional improvements. Benefits are now available for care provided in alternatives to nursing homes such as assisted living facilities. But all known policies still use the old fixed-benefit concept, with benefit amounts crudely based on where the care is provided, and for home health care, sometimes on the type of care provided The inventors herein have observed a general lack of appreciation by the insurance industry of the problems that can be caused by not basing benefits on the widely varying costs of providing care to patients with very different, specific health conditions; such problems can cause significant financial and emotional harm, particularly for people recovering after a hospitalization.
Home health care frequently costs more than nursing home care; it is one-on-one care whereas nursing home care is shared among many patients. This is particularly true for patients recovering from more severe medical conditions. For example, if a patient requires 24-hour-a-day nursing care during the first days of recovery, home health care typically costs $30 an hour ($720 a day). But, very few of today's policies include benefit amounts greater than $150 to $200 a day. Yet, most policies with home health care benefits are sold to seniors with a strongly implied promise that they will keep people out of a nursing home. Thus, seniors who count on their policies to keep them at home often find themselves recovering in nursing homes, unless they or their families spend hard-earned savings to pay for expenses they thought would be covered by their policies.
Home health care patients usually rely on a combination of their long-term care insurance policies and Medicare to pay for their care. While it does pay for 100% of the home health care required by some patients, Medicare on average pays only 45% of all billed home health care expenses. Because an insurance policy with home health care benefits can be inadequate to meet a patient's needs, particularly if highly-skilled care (nurses or therapists) is also needed, the patient, or the patient's family, must somehow make up the difference if the patient is to recover at home.
To save money, friends and family members often provide non-medical assistance during a patient's recovery. This costs caregivers tens of millions of dollars in lost wages each year. And, a recent study found that 31% of the families of seriously-ill patients spent most or all of their life savings on the unreimbursed costs of home health care. Furthermore, Medicare provides no benefits for maintenance or custodial care at home. Thus, people who have developed cognitive impairment, e.g., Alzheimer's Disease or senile dementia, or lost the ability to perform some of the normal activities of daily living without the assistance of another person must rely upon friends and family, their savings and their long-term care insurance policies to provide and pay for the care they need.
These conditions are degenerative; that is, as time passes, patients need ever-increasing care. Once their benefit maximums have been reached, today's fixed-benefit insurance policies force patients to spend their life savings more and more rapidly until they eventually become impoverished and qualify for Medicaid. As a result, patients' spouses and their families often suffer a steadily decreasing standard of living as their assets diminish. In many cases, especially when home health care is no longer affordable, this results in premature confinement in a Medicaid nursing home, with the concurrent loss of independence and privacy for the patient, an emotionally devastating event.
In 1984, Jerry D. Wilson, a co-inventor herein, recognized the inadequacy of fixed-benefit home health care insurance arrangements and developed an insurance benefit system that was much more closely related to the home recovery care needs of patients discharged from hospitals. Wilson reasoned that the cost of a recovering patient's home health care should logically bear a direct relationship to the severity of the medical condition for which the patient was hospitalized. Thus, he based his benefit arrangement on Medicare's Diagnosis Related Groups (DRGs). That is, a specific aggregate dollar amount to pay for home health care was assigned as a maximum benefit limit to each of his DRG-based patient categories, with no daily, weekly, monthly or other duration-specific limits imposed on benefit payments. After incorporation into a home health care insurance policy, his rationale was validated over a 6-year development period during which it was found that more than three out of every four claimants had their expenses for their episode of home health care paid in full before they reached the maximum benefit limit for their medical conditions. As a result, these patients recovered at home, where they wanted to be, usually with little or no out-of-pocket expenses. In other words, their financial health remained intact, thereby allowing them to retain their standard of living after recovery.
Wilson first offered policies incorporating his insurance benefit system to residents of the State of Washington in January 1985 through his own firm, Washington Health Services, Inc. Later, he licensed his system to three insurance companies as the basis for their own home health care policies: Equitable Life & Casualty Insurance Company, Great Republic Life Insurance Company and Commonwealth National Life Insurance Company. Thus far, more than 6,000 such policies have been sold. However, in spite of the success of Wilson's system in providing recuperating patients with sufficient funds to recover at home instead of a nursing home, his system is not known to have been used for any purpose other than as the basis for the benefit arrangement under home health care insurance policies.
As home health care policies based on Wilson's system allowed more patients to recover at home, the number of patients who had to recuperate in nursing homes was reduced. Furthermore, for recuperating patients who spent the early days of their recovery in nursing homes, the average duration of their stays was reduced because policies based on his system provide sufficient funds for more expensive care at home. However, insurance companies have not reduced the premiums of their nursing home policies sold in conjunction with home health care policies based on his system, even though their nursing home claims costs are reduced when people are insured concurrently under policies based on Wilson's system.